By Ike Brannon of Cato. This is a response to an article by Hacker and Pierson in the NY Times.
"The New York Times, in its infinite wisdom, has figured out how poor states can become rich states: simply put, they need only to
increase taxes and spending. It recently publish a piece entitled “the
Path to Prosperity is Blue” which suggested that the states that have
maintained solid growth the last three decades largely owe that growth
to high state government spending, and it suggested that the poor states
follow that formula as well.
The statistical derivation of this conclusion comes from the fact
that the wealthiest states of the U.S. tend to be blue states, which
have higher taxes and spending. By this logic, spending drives growth.
While there is indeed a relationship between a state’s spending and its GDP, the causality is completely contrary to what the Times portrays.
The reality is that states that become prosperous invariably spend more
money. Some of that can represent more spending on public
goods–Connecticut does seem to have better schools than Mississippi–but
far more of it is simply captured by government interests. While
California may have made have created a quality public university system
in the 1950s and 1960s with its newfound wealth, the reason its taxes
are so high today is because it has a ruinous public pension system it
needs to finance. Their high spending isn’t doing its citizenry any good
at all.
New York City and California. two high tax regions, became prosperous
in large part because they were (and remain) a hub for immigrants and
ambitious, entrepreneurial Americans who helped create the industries
that to this day drive the economies of each state. California’s defense
and IT industry did benefit from public investment as well, of course,
but it was investment from the federal government, and in each case it
merely served as a catalyst for the development of industries that went
far beyond the government’s initial investment.
To tell Mississippi that it could become prosperous and pull its
citizenry out of poverty if it only doubled taxes is an absurd notion
that amounts to economic malpractice. What Mississippi has to do is
figure out how to attract and retain talented individuals, which is
easier said than done.
Unfortunately, the Jacksons and Peorias of the
world are not lures to the ambitious Indian engineer or Chinese IT
professional, who’d rather take their chances in Silicon Valley, Los
Angeles, or anywhere else where the quality of life is good and jobs are
plenty.
The lesson to take away from a comparison of the economic status of
the fifty states is that economies of agglomeration is a
vaguely-understood but critically important phenomenon, location
matters, and that it is enormously difficult for states to pivot when
their main industries falter. None of these can be said to be driven by
government spending."
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